If it's your first time filing taxes for your small business, make sure you're prepared in just six easy steps.
If you’re filing small business taxes for the first time, the fear of the unknown can make you question why you started a business in the first place. But here’s a secret for you: filing your business taxes doesn’t have to be scary.
If you’re prepared, filing your taxes can be just another ordinary task in your world of business ownership. In this post, we’ll take the confusion out of tax forms, point you toward money-saving deductions, and help boost your confidence going into the tax season.
Need more tax help? Make sure to check out our small business tax guide, which is perfect for beginners.
Do I Have To File Small Business Taxes?
If you’re a new business owner, you may be unsure if you have to file small business taxes.
If you’re self-employed, you are required to file a tax return if you made net earnings of at least $400. If you own a business, you must file a return, even if you didn’t make a profit.
Some taxpayers may also opt to file a tax return if they qualify for credits, overpaid taxes, or are facing another situation where they may be due a refund.
How To File Small Business Taxes For The First Time
Filing small business taxes for the first time can be intimidating. But with careful preparation, you can save time, reduce stress, and potentially save money by lowering your tax liability.
With these six tips, you can head into this tax season with confidence.
Step 1: Understand Required Tax Forms & Tax Deadlines
The tax forms you need to file are based on your legal business structure.
Let’s look at the different types of business entities, the tax forms associated with each, and important filing dates to avoid penalties.
| Attribute |
Freelancer |
Sole Proprietor |
Partnership |
Corporation |
LLC |
| Can have more than one owner |
|
|
|
|
|
| Owners report profit/loss on individual income tax return |
|
|
|
|
|
| Owners have personal liability protection from business debts |
|
|
|
|
|
And now, let’s take a closer look at each of these types of structures and what filing taxes might look like:
Filing Taxes For Freelancers
If you’re a freelancer, filing small business taxes is simple. In addition to the traditional forms you file annually (like Form 1040), there are a few other forms that must be filed with your individual tax return. Those include:
- 1099-MISC: The 1099-MISC form reports self-employment earnings from a single person or business. Income is reported in Box 7, Nonemployee Compensation. If you made over $600 with a client, the client is required to send you a 1099-MISC. However, all income must be reported on your tax return, even if you do not receive a 1099-MISC form. These forms are required to be sent out by January 31 and are used to report income on your annual tax return due on April 15.
- Schedule C: Schedule C is used to report your profit or loss from your business. On this form, you will provide your business name (or your legal name, if you don’t use a separate business name), contact information, gross sales, expenses, and cost of goods sold (COGS). This form is part of Form 1040 and is submitted with your annual tax return due on April 15.
- Schedule SE: Schedule SE is used to calculate your self-employment tax. This form is used to calculate the amount of Social Security and Medicare taxes you must pay on the income you’ve earned. This form is filed along with your 1040 on or before April 15.
Filing Taxes For Sole Proprietors
Many self-employed individuals are sole proprietors. If you operate a business, a sole proprietorship is the default entity.
Sole proprietors aren’t required to file separate tax returns. They must simply add the required forms to their tax returns. These forms include:
- 1099-MISC: Sole proprietors may receive 1099s from their clients with Box 7, Nonemployee Compensation, filled out. This income information will need to be included in the sole proprietor’s tax return due on April 15. If contract or freelance labor is used within the business, the sole proprietor will need to send out their own 1099s by January 31.
- Schedule C: Schedule C is filed with an individual income return to show the profit or loss of the business. This form is submitted with the tax return due on April 15.
- Schedule SE: Schedule SE is used to calculate the Social Security and Medicare taxes owed by the sole proprietor. This form is included with the individual income tax return due on April 15.
- Form 1040-ES: If you owe the IRS, you may be subject to paying quarterly taxes. Form 1040-ES, Estimated Taxes for Individuals, is used to calculate estimated taxes owed. This form is completed and submitted each quarter, along with the estimated payment. Due dates remain roughly the same each year: April 15, June 15, September 15, and January 15 (of the following year). Dates may change if they fall on a weekend or holiday.
Filing Taxes For Partnerships
As an entity, a partnership may need to file the following tax forms:
- Form 1065: Form 1065 U.S. Return Of Partnership Income (also known as a Schedule K) must be filed by a general partnership each year that it is in business. This is an informational return that must be completed and signed by at least one partner. Partnerships operating on a calendar year must submit this form to the IRS by March 15 (or the next business day if March 15 falls on a weekend or holiday). Partnerships with a tax year must complete and submit the form on the 15th day of the third month after the tax year-end date.
- Schedule K-1: A Schedule K-1 must be filed with the IRS for each partner. This form breaks down the income, credits, and deductions of each partner. All partners should receive a copy of their Schedule K-1. Copies must also be sent to the IRS along with Form 1065.
- Form 941: If the partnership has employees, Form 941 Employer’s Quarterly Federal Tax Return, will need to be filed. This form is used to report income taxes, Social Security taxes, and/or Medicare taxes withheld from an employee’s pay. It is also used for paying the employer portion of Social Security and Medicare taxes. This form is filed quarterly and per the IRS is “generally due by the last day of the month following the end of the quarter.”
- Form 940: Partnerships with employees will also be required to file Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form is used to report annual Federal Unemployment Tax Act taxes. This form must be filed on or before January 31.
While these forms should be filed by the partnership, each partner will also need to complete an individual income tax return. In addition to filing Form 1040, you may also be required to file:
- Schedule E: Schedule E Supplemental Income & Loss is used to report income or loss from a partnership. It is also used to report income or loss from royalties, rental real estate, trusts, and S corporations. This form is filed with an annual tax return due on or before April 15.
- Schedule SE: A Schedule SE that calculates taxes due on net earnings by self-employed individuals should also be filed with an individual’s income tax return. This form is due on or before April 15.
Filing Taxes For Corporations
Corporations are the most complicated business structure, so it should come as no surprise that filing taxes can be a bit more difficult, too. There are two different types of corporations: S corporations and C corporations.
S corporations have a limitation on the number of shareholders it has. Shareholders pay taxes on the profits received from the corporation. A C corporation has no limitations on shareholders. However, the business pays corporate taxes, and the shareholder also pays taxes on the income they’ve received.
The forms that may be required for filing taxes for a corporation include:
- Form 1120: Form 1120 U.S. Corporation Income Tax Return is used to file and pay corporate taxes for C corporations. Per the IRS, “a corporation must file its income tax return by the 15th day of the 4th month after the end of its tax year.”
- Form 1120-S: Form 1120-S U.S. Income Tax Return for an S Corporation is used to report income, gains, losses, credits, and deductions of an S corporation. This must be filed on or before March 15.
- Schedule K-1: A Schedule K-1 for each shareholder must accompany Form 1120-S. This form shows the shareholder’s share of income, deductions, and credits. A copy is provided to each shareholder and is also filed with the 1120-S on or before March 15.
- Form 1120-W: Form 1120-W Estimated Tax for Corporations is used to estimate and pay a corporation’s tax liability. These forms are filed quarterly on April 15, June 15, September 15, and January 15 (of the next year).
- Form 941: Form 941 Employer’s Quarterly Federal Tax Return will need to be filed. This form is used to report income taxes, Social Security taxes, and/or Medicare taxes withheld from an employee’s pay. It is also used for paying the employer portion of Social Security and Medicare taxes. This form is filed quarterly and per the IRS is “generally due by the last day of the month following the end of the quarter.”
- Form 940: Corporations will also be required to file Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form is used to report annual Federal Unemployment Tax Act taxes. This form must be filed on or prior to January 31.
Corporation shareholders must file their individual income tax returns. In addition to Form 1040, shareholders also need to file:
- Schedule E: This form is used to report income or loss from an S corporation.
- Form 1040-ES: This form is used to estimate and pay quarterly taxes. It is filed quarterly on April 15, June 15, September 15, and January 15 (of the following year).
Filing Taxes For LLCs
A single-member limited liability company (LLC) is treated similarly to a sole proprietorship. The activities of the business are reported on the owner’s tax return. In addition to filing a Form 1040, the owner will also need to file:
- Schedule C: This reflects the profit or loss of the business and should be filed with the tax return due on April 15.
- Schedule SE: This calculates taxes due on income earned by self-employed individuals. This is filed with the tax return due on April 15.
Some LLCs are partnerships. In this case, partnership tax rules apply. Other LLCs are corporations and are treated as such in terms of filing and paying taxes.
Regardless of what business structure you have, you can obtain the necessary tax forms and instructions directly from the IRS.
Step 2: Choose An Accounting Method For Your Business
You must choose one of the two accounting methods for your business: cash-basis or accrual.
With cash-basis accounting, income and expenses are recorded when the transaction is complete. Let’s look at a quick example. You have two invoices, each for $500. One client has paid their invoice and has sent the $500. The other invoice has not been paid. In this example, only the paid invoice would be recorded. The unpaid invoice is not recorded until the client sends you the $500 that is owed.
In cash-basis accounting, it works the same way for expenses.
Accrual accounting is different because transactions are recorded as they occur. In other words, the transaction doesn’t have to be complete before the transaction is recorded. Let’s use the same examples from above. You have a paid invoice for $500 and an unpaid invoice for $500. Using the accrual method, you would record an income of $1,000 — even though half of this is still unpaid.
You have to weigh the benefits of each to determine which method is right for you. Cash-basis accounting has tax implications, as you won’t pay taxes on revenue until you’ve received payment. On the other hand, accrual accounting offers better cash flow tracking and higher accuracy throughout the year.
Step 3: Use Accounting Software To Track Income & Expenses
The key to stress-free tax filing is to be organized, and there’s no better way to stay organized than by using accounting software. Accounting software allows you to track your income and expenses for your business. Not only does this help you keep on track with your financial goals, but it simplifies tax filing.
Many accounting programs also offer tax support, providing additional resources and help for tax time. Don’t have accounting software? There’s no better time than right now to get started. Best of all, there are several free and low-cost options perfect for beginners. Start your search by checking out our picks for the best accounting software for small businesses.
Step 4: Gather Your Tax Documents
No one wants to rush around at the last minute to gather what they need to file taxes, so keeping your records and documentation organized throughout the year can reduce stress and shave hours off your tax prep time.
Here are a few of the most common documents you’ll need to have before filing your small business taxes:
- IRS tax forms
- Federal tax ID number
- Prior year’s tax records
- Income records
- Expense records
- Payroll records
- Inventory records
- Financial reports
- Investment records
Step 5: Take Eligible Business Deductions & Credits
It’s normal to be worried about how much you’ll owe the IRS, but the good news is that there’s an easy way to lower your tax liability with deductions and credits.
Claiming eligible business deductions can help ease your tax burden, leaving more money in your pocket. Tax deductions lower your taxable income, potentially putting you in a lower tax bracket.
Many of the common business expenses you have can be deducted. This includes but isn’t limited to these expenses:
- Home office expense
- Commercial car & truck expenses or mileage
- Advertising costs
- Phone & internet service
- Legal fees
Tax credits are another way to lower your tax liability. Tax credits work differently than deductions in that they lower your tax deduction dollar-for-dollar.
There are several tax credits available, including the Employee Retention Tax Credit, the Research and Development Tax Credit, and the Work Opportunity Tax Credit. Learn more about other small business tax credits, and consider hiring an accountant. An accountant can help you determine what credits you’re eligible to receive, which leads to our next step.
Step 6: Hire An Accountant To Help File Your Taxes
It is possible to file your own small business taxes, especially with the help of accounting and tax software. But this may not be the best choice for your business.
Sure, you can save money initially by going the DIY route. But hiring an accountant may be well worth the extra expense, especially if you have no prior tax experience. An accountant makes sure that all forms are properly completed and filed with the IRS. Failing to complete a form or doing your taxes incorrectly can result in payments and penalties that can add up quickly.
Additionally, you may even end up saving money by hiring an accountant. A professional can find deductions that you previously overlooked, helping to reduce your tax liability. If you’re properly prepared and have all of the documentation your accountant needs, you’ll reduce the number of hours an accountant spends on your tax return. In other words, a little bit of preparation can help cut this expense significantly.
If your tax return is particularly complicated or you just don’t know where to begin, there’s no shame in leaving it to the pros. You can also hire an accountant to review your return before you file.
Next Steps For First-Time Tax Filers
Tax season doesn’t have to be intimidating, even if you’ve never done small business taxes before. Start by finding accounting software you love, getting acquainted with the various IRS tax forms you’ll need, and keeping your records organized.
Once you start your taxes, make sure you check every box on our small business tax checklist. If your business has employees, ensure you’re up-to-date on filing and paying payroll taxes to avoid trouble with the IRS.
Finally, don’t forget to reach out to an accountant if you need a professional to step in.
